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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21717
CASCO INTERNATIONAL, INC.
formerly CA Short Company, Inc.
Incorporated - Delaware I.R.S. Identification No. 56-0526145
4205 East Dixon Boulevard, Shelby, North Carolina 28150
Registrant's Telephone Number (704) 482-9591
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of latest practicable date 1,783,200 common shares outstanding,
each with par value $0.01, as of November 6, 1998.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
September 30, 1998 and December 31, 1997
Unaudited
ASSETS 1998 1997
------------ ------------
Current Assets:
Cash $ 132,593 $ 73,516
Accounts receivable 1,971,551 5,043,423
Inventory 5,489,028 4,545,752
Prepaid expenses 1,219,950 973,329
------------ ------------
Total current assets 8,813,122 10,636,020
Buildings and equipment:
Buildings 2,601,563 3,194,058
Equipment 2,674,029 2,025,552
------------ ------------
5,275,592 5,219,610
Less accumulated depreciation (1,844,571) (1,664,540)
------------ ------------
3,431,021 3,555,070
Land 111,468 211,468
------------ ------------
Total property and equipment, net 3,542,489 3,766,538
Other assets:
Cost in excess of net assets acquired, net of
accumulated amortization of $307,971 and
$267,608 respectively 2,385,129 1,098,859
Other 672,567 646,256
------------ ------------
3,057,696 1,745,115
------------ ------------
TOTAL ASSETS $ 15,413,307 $ 16,147,673
============ ============
The accompanying notes are an integral part of the financial statements.
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CASCO INTERNATIONAL, INC.
BALANCE SHEETS
September 30, 1998 and December 31, 1997
Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------ ------------
Liabilities:
Accounts payable $ 415,942 $ 1,062,112
Short-term debt obligations 1,537,938 --
Short-term subordinated debenture -- 100,000
Accrued liabilities 128,939 320,157
Advanced deposits-current 1,951,471 1,951,471
------------ ------------
Total current liabilities 4,034,290 3,433,740
------------ ------------
Long-term debt 2,562,500 --
Advanced deposits-noncurrent 2,674,956 2,558,517
Subordinated debenture -- 4,900,000
Deferred tax liability 404,850 67,650
------------ ------------
Total Liabilities 9,676,596 10,959,907
Commitments and contingencies -- --
Stockholders' equity:
Preferred Shares: $.01 par value; authorized
300,000 shares; none issued and outstanding -- --
Common Shares par value $.01, authorized
5,000,000, issued 1,783,200 17,832 17,832
Capital in excess of par value 6,417,586 6,417,586
Accumulated deficit (698,707) (1,247,652)
------------ ------------
Total stockholders' equity 5,736,711 5,187,766
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,413,307 $ 16,147,673
============ ============
The accompanying notes are an integral part of the financial statements.
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CASCO INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
For the three months and the nine months ended
September 30, 1998 and 1997
Unaudited
Three Months Nine Months
1998 1997 1998 1997
Revenue $ 3,545,052 $ 3,469,869 $ 13,075,763 $ 11,913,018
Operating costs and expenses:
Cost of goods sold 2,025,705 2,027,581 7,352,719 6,807,794
Selling, general and administrative 1,748,148 1,917,565 5,595,690 5,779,248
Depreciation and amortization 141,172 91,683 351,756 265,830
----------- ----------- ------------ ------------
Total operating costs and expenses 3,915,025 4,036,829 13,300,165 12,852,872
Operating income (loss) (369,973) (566,960) (224,402) (939,854)
Other income and (expenses)
Interest expense (111,223) (94,022) (238,309) (351,885)
Loss on sale of building -- -- (151,144) --
----------- ----------- ------------ ------------
Total other income and (expenses) (111,223) (94,022) (389,453) (351,885)
Income (loss) before income taxes and
extraordinary item (481,196) (660,982) (613,855) (1,291,739)
Deferred (provision) benefit for income taxes 182,400 252,000 232,800 493,000
----------- ----------- ------------ ------------
Income (loss) before extraordinary gain on
retirement of debt (298,796) (408,982) (381,055) (798,739)
----------- ----------- ------------ ------------
Extraordinary gain on retirement of debt (less
applicable income taxes of $570,000) -- -- 930,000 --
----------- ----------- ------------ ------------
Net Income (Loss) $ (298,796) $ (408,982) $ 548,945 $ (798,739)
=========== =========== ============ ============
EARNINGS PER SHARE BASIC AND DILUTIVE
Income (loss) before extraordinary item $ (0.16) $ (0.37) $ (0.22) $ (0.77)
Extraordinary gain on retirement of debt $ -- $ -- $ 0.52 $ --
----------- ----------- ------------ ------------
Net Income (Loss) $ (0.16) $ (0.37) $ 0.30 $ (0.77)
=========== =========== ============ ============
Weighted average common shares outstanding 1,783,200 1,112,232 1,783,200 1,040,207
=========== =========== ============ ============
The accompanying notes are an integral part of the financial statements.
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CASCO INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
Unaudited
1998 1997
----------- -------------
Cash flows from operating activities:
Net income (loss) $ 548,945 $ (798,739)
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation and amortization 351,756 265,830
Loss of sale of building 151,144 --
Extraordinary gain on retirement of debt (930,000) --
Deferred provision (benefit) 337,200 (493,000)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 3,071,872 3,083,973
Inventory (943,276) 1,706,710
Prepaid expenses and other assets (275,477) (7,580)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (837,388) (1,383,495)
Advance deposits 116,439 (549,651)
----------- ------------
Total adjustments 1,042,270 2,622,787
----------- ------------
Net cash provided by operating activities 1,591,215 1,824,048
----------- ------------
Cash flows from investing activities:
Sale of building 421,187 --
Payments for purchases of property and equipment (657,128) (100,098)
Payment for acquisition (1,126,633) --
----------- ------------
Cash used in investing activities (1,362,574) (100,098)
Cash flows from financing activities:
Proceeds from debt obligation 9,013,472 14,905,007
Principal payments on debt (9,183,036) (18,574,753)
Issuance of Common Stock Units -- 3,310,928
----------- ------------
Cash used in financing activities (169,564) (358,818)
Increase (decrease) in cash 59,077 1,365,132
Cash, beginning of period 73,516 130,971
----------- ------------
Cash, end of period $ 132,593 $ 1,496,103
=========== ============
Other Cash Flow Information:
Cash payments during the year for:
Interest $ 262,397 $ 351,885
Income taxes, net of refunds -- --
Noncash Financing Activities:
Note Payable Acquisition $ 200,000 $ --
Goodwill $ 200,000 $ --
Subordinated debenture with Pages assumed at spin-off $ -- $ 5,000,000
Due to Pages replaced with subordinated debenture $ -- $ 4,124,975
Decrease in capital in excess of par value and
common stock from spin-off $ -- $ 870,025
The accompanying notes are an integral part of the financial statements.
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CASCO INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited
The accompanying financial statements have not been audited, but
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of financial position, results of operations and cash flows
for the periods presented. All adjustments are of a normal and recurring nature.
These consolidated financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the fiscal year
ended December 31, 1997.
Effective at the close of business on December 31, 1996, a tax free
spin off of the Company's common stock from its former parent, Pages, was
completed (the "Distribution"). In the Distribution, for every ten shares of
Pages common stock outstanding on the record date, one and one-half shares of
the Company's common stock was distributed to Pages shareholders.
On January 23, 1998 the Company redeemed, at a discount, the
subordinated debenture due to Pages on January 1, 2002. The debenture in the
original principal amount of $5 million was redeemed for $3.5 million.
Also on January 23, 1998, Huntington National Bank increased the
Company's line of credit from $2 million to $5.5 million from which funds became
available to redeem the subordinated debenture due to Pages. On July 30, 1998,
the Company replaced the line of credit with the Huntington National Bank with a
$5 million line of credit with Branch Banking & Trust.
On March 4, 1998 the Company sold its 167,000 sq. ft. Kings Mountain
warehouse. The sale netted the Company approximately $425,000. Also on March 4,
1998 the Company obtained financing from First National Bank secured by a first
deed of trust on the Shelby facilities. The loan is in the amount of $2,362,500
at an interest rate of prime plus 1/2% and will not increase or decrease more
than two percent. The term of the loan is fifteen years, callable after 5 years.
On July 30, 1998 the Company entered into an agreement with Awards &
Gifts, Inc. and Richard W. Terlau, Jr., providing for the purchase of
substantially all assets and certain liabilities of Awards & Gifts by the
Company. Under the terms of the Asset Purchase Agreement, the assets included
Awards & Gifts customer list, machinery and equipment, inventories, Awards &
Gifts intellectual property assets, prepaid expenses, and general intangibles,
the liabilities included the assumption of an equipment lease and a real
property lease. The purchase price for the assets was $1.5 million with certain
adjustments made for pro-rated items, with $1.3 million in cash and a $200,000
promissory note. The note is secured by an Irrevocable Standby Letter of Credit
issued by Branch Banking & Trust Company. The purchase price under the Asset
Purchase Agreement was determined by arm's length negotiations between the
parties based on the market value of the assets purchased and sold. The
acquisition was financed with proceeds from its revolving credit facility with
Branch Banking & Trust Company.
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During the three months ended September 30, 1998, options were
granted under the Company's 1998 Incentive Stock Option Plan and under the
Non-Employee Director Stock Option Plan as shown on the following table. The
ending and average market price of the Company's stock for the three months
ended September 30, 1998 was $1.5937 and $2.2662, respectively.
Date Shares
Granted or Reserved and Exercise
Issued Exercisable Price
--------------------------- ----------------------- ------------------
INCENTIVE STOCK OPTION PLAN
September 2, 1998 65,000 $2.00
NON-EMPLOYEE DIRECTOR STOCK
OPTION PLAN
September 2, 1998 15,000 $2.00
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Quarter and Nine Months Ended September 30, 1998 Compared to Quarter and Nine
Months Ended September 30, 1997:
Revenues for the three months ended September 30, 1998 approximated
$3.55 million, compared to $3.47 million in revenues for the three months ended
September 30, 1997, an increase of 2.2% or approximately $75,000. The increase
is attributable to new customers in the new markets with employed recognition
consultants and the acquisition of Awards & Gifts, Inc., on July 30, 1998.
Revenues for the nine months ended September 30, 1998 approximated
$13.08 million, compared to $11.91 million in revenues for the nine months ended
September 30, 1997, an increase of 9.76% or approximately $1.16 million. The
increase is attributable to strong retention of existing customers coupled with
new customers in the new markets with employed recognition consultants, and the
acquisition of Awards & Gifts, Inc. on July 30, 1998.
Cost of goods sold for the three months ended September 30, 1998
approximated $2.03 million, compared to approximately $2.03 million of cost of
goods sold for the three months ended September 30, 1997. As a percentage of
revenues, cost of goods sold decreased to 57.14% for the three months ended
September 30, 1998, from 58.43% for the three months ended September 30, 1997.
The 1.29% decrease in the cost of goods sold as a percentage of revenues was
principally attributable to a change in product mix and the initial phases of an
improved inventory purchasing strategy.
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Cost of goods sold for the nine months ended September 30, 1998
approximated $7.35 million, compared to approximately $6.81 million of cost of
goods sold for the nine months ended September 30, 1997, an increase of 8.00% or
approximately $545,000. The increase in cost of goods sold was attributable to
the increase in revenues. As a percentage of revenues, cost of goods sold
decreased to 56.23% for the nine months ended September 30, 1998, from 57.15%
for the nine months ended September 30, 1997. The 0.92% decrease in the cost of
goods sold, as a percentage of revenues was principally attributable to a change
in product mix, and an improved inventory purchasing strategy.
Selling, general, and administrative expense for the three months
ended September 30, 1998 approximated $1.75 million, compared to $1.92 million
for the three months ended September 30, 1997, a decrease of 8.8% or
approximately $170,000. The decrease in selling, general, and administrative
expense were principally attributable to benefits obtained from aggressive cost
containment policies. As a percentage of revenues, selling, general and
administrative decreased to 49.31% for the three months ended September 30,
1998, from 55.26% for the three months ended September 30, 1997. The 5.95%
decrease as a percentage of revenues were principally attributable to benefits
obtained from aggressive cost containment policies, and the increase in revenues
generated by the employed sales force.
Selling, general and administrative expense for the nine months ended
September 30, 1998 approximated $5.60 million, compared to $5.78 million for the
nine months ended September 30, 1997, a decrease of 3.18% or approximately
$184,000. As a percentage of revenues, selling, general, and administrative
expenses decreased to 42.79% for the nine months ended September 30, 1998, from
48.51% for the nine months ended September 30, 1997. The 5.72% decrease as a
percentage of revenues was principally attributable to benefits obtained from
aggressive cost containment policies, and the increase in revenues generated by
the employed sales force.
Interest expense was approximately $111,000 for the three months
ended September 30, 1998, compared to $94,000 for the three months ended
September 30, 1997, an increase of approximately $17,000. For the nine months
ended September 30, 1998 interest expense was approximately $238,000 compared to
approximately $352,000 for the nine months ended September 30, 1997, a decrease
of approximately $114,000. The reduction in interest expense was primarily due
to the early redemption of the Company's subordinated debenture due to Pages on
January 1, 2002. The debenture in the original amount of $5 million was redeemed
for $3.5 million. The average outstanding debt for the first nine months in 1998
approximated $2.7 million compared to $6.4 million for the first nine months in
1997. Additionally, the average interest rate for the first nine months in 1998
approximated 9.11% compared to approximately 7.51% for the same period in 1997.
Depreciation and amortization expense was approximately $141,000 for
the three months ended September 30, 1998, compared to $92,000 for the three
months ended September 30, 1997, an increase of 53.98% or approximately $49,500.
Depreciation and amortization expense was approximately $352,000 and $266,000
for the nine months ended September 30, 1998 and 1997 respectively, an increase
of
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32.32% or approximately $86,000. The increase in depreciation and amortization
expense was principally attributable to the depreciation of newly acquired
assets in 1997 and 1998.
Income tax benefit was $232,800 for the nine months ended September
30, 1998, compared to an income tax benefit of $493,000 for the nine months
ended September 30, 1997. The provisions for income tax benefit were calculated
through the use of estimated income tax rates based upon the loss before taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash generated
from operating activities and amounts available under its existing credit
facility and proceeds from the public offering of units consisting of common
stock and warrants during the third quarter of 1997. The Company's primary uses
of funds consist of financing inventory and receivables and for acquisitions.
The Company has adopted a growth strategy, which will be accomplished
through increased efforts of the Company's existing, highly trained sales force,
in order to expand current market share and enter into new markets.
The Company anticipates that operating cash flows during the next
twelve months, coupled with its ability to borrow under the credit facility and
the proceeds from the sale of the Kings Mountain warehouse and the first deed of
trust on the Shelby facility, will cover operating expenditures and meet the
short-term debt obligations. The Company's credit facility is due and payable in
full on July 30, 1999. Although the lender has not issued a commitment to do so,
the Company's relationship with its lender is favorable and the Company
anticipates that the credit facility will be renewed when due.
Effective at the close of business on December 31, 1996, a tax free
spin off of the Company's common stock from its parent, Pages, was completed
(the "Distribution"). In the Distribution, for every ten shares of Pages common
stock outstanding on the record date, one and one-half shares of the Company's
common stock was distributed to Pages' stockholders. The Company entered into a
$5 million, 7% subordinated debenture with Pages simultaneously with the
Distribution in satisfaction of amounts due to Pages by the Company. The excess
of the amount due to Pages as of the Distribution over the $5 million
subordinated debenture was recorded as paid in capital. Based on the
consummation of the Distribution effective January 1, 1997, the amounts due to
Pages previously recorded as current were reclassified to long term, thus
significantly increasing the Company's net working capital, as described earlier
in this section. The Company discharged the debenture in full in January 1998
for $3.5 million.
The Company does not anticipate any material expenditures for
property and equipment during the next twelve months.
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The Company is aware of no trends or demands, commitments or
uncertainties that will result in, or that management believes are reasonably
likely to result in, the Company's liquidity increasing or decreasing in any
material way. The Company is aware of no legal or other contingencies, the
effects of which are believed by management to be reasonably likely to have a
material adverse effect on the Company's financial statements.
SEASONALITY
The Company's business is highly seasonal, with approximately 39% of
its revenues and most of its profits recorded in the months of November,
December, and January. As a result, the Company's working capital requirements
are highest during November and December when the combination of receivables and
inventory are at peak levels. The Company typically experiences losses in its
second and third quarters.
As the results from the Company's growth strategy develop, the effects
of seasonality should diminish. The business categories on which the Company has
chosen to focus offer steadier revenue flows, as well as more consistent
requirements for working capital.
INFLATION
Although the Company cannot determine the precise effects of
inflation, inflation has an influence on the cost of the Company's products and
services, supplies, salaries, and benefits. The Company attempts to minimize or
offset the effects of inflation through increased sales volumes and sales
prices, improved productivity, alternative sourcing of products and supplies,
and reduction of other costs. The Company generally has been able to offset the
impact of price increases from suppliers by increases in the selling prices of
the Company's products and services.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding matters that are not historical facts and "forward looking statements"
(as such term is defined in the Private Securities Litigation Reform Act of
1996) and because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Those statements include remarks regarding the
intent, belief, or current expectations of the Company, its directors, or its
officers with respect to, among other things: (i) future operating cash flows;
(ii) the Company's financing plans, and (iii) the Company's growth strategy,
including the expansion of current market share and the entrance into new
markets. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a
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result of various factors. The accompanying information contained in this Form
10-Q, including without limitation and information set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", identifies important factors that could cause such differences.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is not involved in any material pending legal
proceedings, other than ordinary, routine litigation incidental to its business.
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
Exhibit Method
Number Description of filing
------- ----------- ---------
1 Underwriting Agreement 1
2 Agreement and Plan of Merger 1
3(i).1 Certificate of Incorporation 1
3(i).2 Certificate of Amendment to
Certificate of Incorporation 1
3(ii) Bylaws 1
4.1 Form of Stock Certificate 1
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4.2 Warrant Agreement 1
4.3 Form of Warrant Certificate 1
4.4 Form of Warrant-R.L. Renck & Company 1
10.1 1996 Incentive Stock Option Plan 1
10.2 Employee Stock Option Plan 1
10.3 Huntington Loan Documents:
10.3.1 Loan and Security Agreement 1
10.3.2 Revolving Note 1
10.3.3 Commercial Letter of Credit
Reimbursement Agreement 1
10.3.4 Deed of Trust, Assignment of
Rents and Security Agreement 1
10.3.5 Debt Subordination and
Intercreditor Agreement 1
10.3.6 Third Amendment to Loan
and Security Agreement 1
10.3.7 Third Note Modification
and Extension Agreement 1
10.4 Non-Employee Director Stock Option Plan 1
10.5 Amendment to 1996 Incentive
Stock Option Plan 1
10.6 1997 Incentive Stock Option Plan 1
10.7 Charles R. Davis' Performance
Option Agreement 1
10.8 First National Bank Loan Document 1
10.9 Branch Banking & Trust Loan Document 1
10.10 1998 Incentive Stock Option Plan 2
10.11 Non-Employee Director Stock Option Plan 2
27 Financial Data Schedule 2
1. Incorporated by reference to the Company's registration statement on Form 10,
file number 0-271717, filed in Washington, D.C.
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2. Filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was dated and filed on August 14, 1998, under Item 2
on the acquisition of all the assets of Awards & Gifts, Inc.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CASCO INTERNATIONAL, INC.
Registrant
Date: November 12, 1998 By: /s/ Jeffrey A. Ross
------------------------
Jeffrey A. Ross
Principal Financial and
Accounting Officer